Prediction: US ten year yields will be below 7% up until 2016

Bloomberg story:

Vanguard Group Inc., whose $148.2 billion of Treasuries makes it the largest private owner of US debt, says the nation has until 2016 to contain its borrowings before bond investors revolt and drive up interest rates

The interesting thing here is that many people have said this would happen in 2009.  And 2010. And 2013. Vanguard is saying it will take 4 years.

I’m saying US interest rates won’t get to “unsustainable panic levels” taken, very loosely, by many to be 7% by 2016. I also don’t think it will happen for a while after then, but hey, there is an expanding funnel of doubt and I can’t predict everything that will happen.

I’m also not saying interest rates won’t increase between now and then at all.  Economic recovery in this period is possibly, at least to some extent, and this would result in higher interest rates through concerns around future inflation and an increase in short term rates that would give rise to reasonable expectations of higher short term rates in future.

My logic? The US borrows in its own currency.  The US still has a major economy.  Japan has had similar issues and is borrowing at incredibly low rates for 20 years of stagnation and ultra low inflation to deflation. There is a history here to learn from.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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